The 13 percent rally in the Standard & Poor’s 500 Index has lifted the gauge to its highest level ever compared with strategists’ forecasts, a sign the best may be over for U.S. equities in 2012.
Shares have climbed 2.1 percent above the average projection of 1,389 from 13 firms from Morgan Stanley (MS) to JPMorgan Chase & Co. (JPM) tracked by Bloomberg. That’s the biggest premium on record for this time of year, according to data going back to 1999. Estimates by strategists in August have come true the last three years, with the S&P 500 rising 11 percent on average through December, the data show.
Weakening earnings at companies from Advanced Micro Devices Inc. (AMD) to Wynn Resorts Ltd. (WYNN), the U.S. presidential elections and Europe’s debt crisis mean stocks are unlikely to climb, says Jonathan Golub, the New York-based chief U.S. market strategist at UBS AG. (UBSN) Those concerns are already reflected in valuations 12 percent below the almost six-decade average, so shares have room to keep rising in the expanding economy, according to Thomas Lee, chief U.S. equity strategist for JPMorgan Chase.
“When you look at the lack of earnings growth and economic growth, there’s just no reason for the stock market to have to go higher,” Golub said in an Aug. 14 phone interview. “There’s the election and you have questions about monetary policy in the U.S. You have a situation in Europe, and no matter how good anybody is feeling about it today, it’s not resolved.”
Economic Reports
Golub forecasts the S&P 500 will end the year at 1,375, or 3 percent below the closing level on Aug. 17. U.S. stocks rose last week, sending the index up 0.9 percent to 1,418.16, the highest since April, as reports from building permits to retail sales topped economists’ estimates. September futures on the S&P 500 added 0.1 percent to 1,416.3 at 8:05 a.m. in London today.
Strategist calls have been an average of 9.1 percent above the S&P 500 at this time of year since 1999 and have never been below, data compiled by Bloomberg show. Wall Street firms, in the past three years, estimated gains of 10.3 percent over the last five months, compared with the benchmark index’s mean advance of 10.6 percent, the data show.
This year, strategists lifted the average prediction of 1,344 in January to 1,387 in April and again to 1,400 by May 8, a month after the gauge peaked at 1,419.04. The estimate came down as the benchmark index lost 9.9 percent through June 1.
Speculation that Europe’s debt crisis and China’s slowdown will curtail growth bolstered bets that central banks will continue to support the global economic recovery and sent the S&P 500 up 11 percent since June. The People’s Bank of China cut interest rates twice this year while the Federal Reserve and the European Central Bank signaled they may act to stimulate the economy.
‘More Fear’
“More fear about the U.S. earnings trajectory” will be a catalyst that sends stocks lower, Adam Parker, the New York- based U.S. equity strategist at Morgan Stanley, whose estimate for 2011 proved the most accurate, said in a telephone interview on Aug. 16. “People have not been bearish about earnings. They believe that earnings are only going to modestly decline and our view is that 2013 earnings are going to be about $99,” or about 4 percent below the analyst consensus, Bloomberg data show.
Parker forecasts the S&P 500 will slide 18 percent to 1,167. A continuing crisis in the euro zone and decelerating economies in emerging markets may weigh down equities, he said.
Analysts (SPX) have trimmed earnings estimates since the year started. The project S&P 500 companies will earn a total of $103.18 a share in 2012, down from $105.27 at the beginning of the year, and $115.33 next year. They are still more optimistic than strategists, whose forecasts are 1.7 percent lower for this year and 7.7 percent below the projection for 2013.
Weakest Quarter
Second-quarter earnings were the weakest in three years, according to data compiled by Bloomberg. Sales growth slowed to 0.8 percent and profit increased 0.3 percent, the worst quarter since the second half of 2009, Bloomberg data show.
Advanced Micro Devices, the second-biggest maker of processors for personal computers, posted second-quarter profit of 5 cents a share, down 3 cents from last year. Revenue fell 10 percent to $1.41 billion, and the Sunnyvale, California-based company predicted sales from July through September will decline as much as 4 percent sequentially as demand for PCs is cut by the slowing economy.
Wynn, the casino company run by billionaire Steve Wynn, reported last month second-quarter earnings and sales dropped because of lower winnings in Macau and Nevada. Excluding items, profit was $1.38 a share, compared with $1.60 a year ago. Revenue declined 8.3 percent to $1.25 billion, the Las Vegas- based company said.
GDP Growth
Gross domestic product in the U.S. will probably expand at a 2.2 percent rate in 2012, compared with 1.8 percent last year, according to the median estimate of 78 economists surveyed by Bloomberg. The euro-zone economy is estimated to contract 0.5 percent after rising in 2011. The growth rate in China is forecast to slow to 8.2 percent from 9.2 percent.
The stronger U.S. expansion will support earnings and make stocks bargains, according to JPMorgan’s Lee. He estimates the index will rise another 0.8 percent to 1,430 this year. The S&P 500’s price-earnings ratio was 14.4 last week, down from 18.9 in March 2010 and compared with the 16.4 average since the 1950s, according to data compiled by Bloomberg.
“I’m not super worried about earnings,” Lee said in a phone interview on Aug. 14. “Economic data is starting to pick up.” While the recovery is slowing in Europe and China, “it’s already reflected in the forecast,” he said.
The S&P 500 may reach 1,500 this year as the economy picks up momentum in the fourth quarter, according to Byron Wien, vice chairman of Blackstone Group LP’s advisory services unit. His estimate is above the highest projection from the 13 strategists tracked by Bloomberg and 4.3 percent from the 1,565.15 all-time peak reached in October 2007.
‘Getting Better’
“Housing is bottoming, gasoline is down from the beginning of the year, and 90 percent of the people in the country have jobs,” Wien said in an interview on Aug. 15 on Bloomberg Television. “The European situation is getting better, not resolved, but getting better,” he said. “There will be more good news than bad.”
The S&P 500 has posted average annual gains of 3 percent in the last decade, ending little changed last year after rising 13 percent in 2010 and 23 percent in 2009. The average increase since 1992 is 7.4 percent.
About 46.1 percent of S&P 500 sales last year came from outside the U.S. based on 252 companies that reported the information, according to an Aug. 9 S&P Dow Jones Indices study by Howard Silverblatt, senior index analyst at the firm. That’s down from 46.3 percent in 2010 and 47.9 percent in 2008. Technology stocks had the biggest proportion of sales from overseas, with 57 percent, the report said.
“The broader macro growth environment particularly international, which has been a bigger driver of earnings than was the case in past cycles, looks pretty bleak,” said Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc (BARC) who estimates the S&P 500 will fall to 1,330. “The risks are getting bigger and bigger.”
Source: Bloomberg News
